The American Dream of college education has turned into a nightmare for many saddled with student debt, but momentum is building in Congress for a solution that could benefit workers and employers alike.
Rep. Rodney Davis (R-Ill.) is pushing one of two bills that advocate for a small change in federal tax law to help avert billions of dollars in student loan defaults. His proposal would give businesses and workers a tax break when employers give their employees money to pay off their student loans.
Some bosses already offer workers extra cash to pay down student debt, in a bid to recruit and retain young employees and help them plan for retirement. Lenders have hailed the policy as the “hottest employee benefit today.”
With more than 40 million Americans collectively owing $1.3 trillion on their student loans -- and one in four of them either delinquent or in default -- some economists and policymakers worry that too many households are cutting back their spending and saving to pay off their student loans.
But companies that offer the benefit typically can’t deduct those payments from their tax bill. And workers who receive student loan help from their employers have to pay taxes on the money as if it were income.
For borrowers with federal student loans, which comprise more than 90 percent of all student debt, that means that workers and their bosses are paying the U.S. government twice: One set of payments from the employer to the Education Department to pay down debt and another from the employee to the Internal Revenue Service.
That’s part of the reason why so few businesses offer to help their employees pay down their student loans. Just 3 percent of employers offer a student loan repayment plan, a Society for Human Resource Management survey found last year.
Employers can already can reduce their tax bill by offering to spend up to $5,250 for additional education for their workers, but Davis’ proposal would broaden that to include payments on education debt.
Getting employers to partially pay off their workers’ student debt could help borrowers make their payments on time or ahead of schedule.
This won’t solve the student debt crisis, but it’s an incremental step that’s appealing. SoFi general counsel Rob Lavet
“This could save billions of dollars in [loan] defaults,” Davis told The Huffington Post.
Twenty other House lawmakers -- 11 Republicans and nine Democrats -- back Davis’s bill, which would tweak the law to prevent workers from getting taxed on employer-sponsored student loan repayment plans. Four other legislators, one Democrat and three Republicans, back a similar measure in the Senate. Neither bill has been voted on, and lawmakers said they don’t know how much the measure could cost the U.S. Treasury in forgone tax revenue.
Rob Lavet, general counsel at Social Finance, the online lender known as SoFi, believes that the economic and financial benefits of the proposal outweigh its potential cost in lost taxes.
Lavet said workers would have more money to spend if their employers helped them pay off their student loans. Consumer spending accounts for nearly 70 percent of U.S. economic activity, and putting more money in the hands of households could spur them to spend it on goods and services.
Employers that make payments toward their workers’ federal student debt could help their employees stay current on their loans, averting possible defaults, Davis said. The fiscal benefit of fewer defaults and more on-time payments could offset the cost of forgone tax revenue, Lavet said.
“This won’t solve the student debt crisis, but it’s an incremental step that’s appealing,” Lavet said.
The proposal would also help SoFi, which got its start refinancing expensive student loans, because the company works with hundreds of employers such as Credit Suisse and Duff & Phelps to offer their workers various student loan benefits.
Getting employers to help their employees pay down their student debt was one of the reasons why Davis said he proposed the measure. After all, employers benefit from a highly educated workforce. But employees are the ones who shoulder the burden of repaying debt incurred for college degrees.
SoFi has been lobbying members of Congress to get the proposal enacted into law, federal records show. Lavet said his company also has encouraged employers to contact their representatives in Congress to lobby for its passage.